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October 10, 2014

Krugman vs. Krugman on Carbon Taxes

October 10, 2014
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As time passes, those calling for aggressive government action in the name of fighting climate change have had to ramp up their rhetoric and, in many cases, change their story from just a few years earlier. A recent example is Paul Krugman, when he describes a new IMF study by saying that government policies to reduce carbon dioxide emissions may now have zero cost. (!) Not only is this totally wrong—the study’s authors certainly claim no such thing—but it contradicts what a more sensible Krugman wrote back in 2009, when he warned his green comrades to not say cringe-worthy things about there being free lunches in fighting climate change.

Krugman of Christmas Past Says Carbon Taxes Will Be Costly

First let’s recall that Krugman as of 2009 was still an economist when it came to climate change. He was certainly for a carbon tax and other measures to fix alleged “market failures,” but he recognized that these government policies would come with tradeoffs.

In fact, in an article explaining why he thought the benefits of fighting climate change would far surpass the costs, Krugman took the time to wag his finger at some of his economically-illiterate allies in the struggle by writing this: “Yes, limiting emissions would have its costs. As a card-carrying economist, I cringe when ‘green economy’ enthusiasts insist that protecting the environment would be all gain, no pain.”

Notice the rhetorical move he made: Krugman said “as a card-carrying economist.” That underscores the point I am making in the present post, namely that Krugman has completely repudiated basic economics when he now tries to argue that government policies to reduce carbon emissions may have zero cost.

Presumably what happened is that Krugman has realized that the American public is not willing to sacrifice economic growth today for a computer model’s projections of benefits that will only start accruing to our grandkids in 2060 and beyond. So he has now turned into the cringe-worthy green enthusiast that he was criticizing only five years ago.

Krugman Now Says Carbon Taxes Are Totally Painless

And thus, on September 18, 2014, Krugman wrote a column for the NYT in which he became that which he previously abhorred. Here are some excerpts that give the gist of Krugman’s piece:

This just in: Saving the planet would be cheap; it might even be free. But will anyone believe the good news?

I’ve just been reading two new reports on the economics of fighting climate change: a big study by a blue-ribbon international group, the New Climate Economy Project, and a working paper from the International Monetary Fund. Both claim that strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth. This may sound too good to be true, but it isn’t. These are serious, careful analyses.

…[I]t turns out that putting a price on carbon would have large “co-benefits” — positive effects over and above the reduction in climate risks — and that these benefits would come fairly quickly. The most important of these co-benefits, according to the I.M.F. paper, would involve public health: burning coal causes many respiratory ailments, which drive up medical costs and reduce productivity.

And thanks to these co-benefits, the paper argues, one argument often made against carbon pricing — that it’s not worth doing unless we can get a global agreement — is wrong. Even without an international agreement, there are ample reasons to take action against the climate threat.

But back to the main point: It’s easier to slash emissions than seemed possible even a few years ago, and reduced emissions would produce large benefits in the short-to-medium run. So saving the planet would be cheap and maybe even come free.

Not only has Krugman gone against his proclamation in 2009—I wonder if his “economist card” has been revoked?—but what he is arguing about makes absolutely no sense. He is conflating “extra benefits” with “lower costs.”

It’s a bit confusing because Krugman is discussing two separate studies; in the block quotation above we’ve only focused on the IMF study, in the interest of brevity. But he also says upfront, “Both [studies] claim that strong measures to limit carbon emissions would have hardly any negative effect on economic growth, and might actually lead to faster growth.” That certainly makes it sound as if either study taken in isolation leads to his result, not that you need to link them in a one-two punch.

The IMF Study Does Not Say Fighting Climate Change Will Be Cheap—Let Alone Free

Of the two studies Krugman links, the IMF one is by far the more rigorous; the website of the “blue-ribbon international group” looks like it’s announcing the logistics for a music festival, rather than presenting economic arguments. That’s why I’ll focus on the IMF study in this post.

What the study argues is that there are all sorts of “co-benefits” from taxing carbon dioxide emissions, above and beyond mitigating climate change. I’ll come back to this topic in a future post, but for our purposes I want to make the simple point: Even if it is true that there are more BENEFITS to a carbon tax than previously thought, that has nothing to do with the COST of such policies.

I can’t believe I have to spell out the distinction between costs and benefits, but Krugman’s post is quite blurry on it. So let’s use an analogy: Suppose a man wants to buy a new convertible for $50,000, but his wife says, “We can’t afford that! The cost is way too high! You can keep your current car and we’ll be able to secure our retirement savings with that money instead.”

The guy is flummoxed by his cheapskate wife, so he pokes around the Internet for a few hours. He comes back to her and announces triumphantly, “Aha! Turns out buying that convertible will be very cheap, even free. I found online some doctors claiming that Americans aren’t getting enough natural sunlight, and that this vitamin D deficiency could be shortening their lifespans. By my calculations, the co-benefits of buying this car are anywhere from $40,000 – $60,000. So you see, at most it’s costing us $10,000, and if anything we’re actually coming out ahead financially.”

Would the wife be fooled by this argument, even accepting the sunlight claims at face value? Well, assuming she’s a better economist than Paul Krugman, she wouldn’t. She would quite rightly point out that the economic cost of the car was still the value of the other things the household could’ve done with the $50,000 the husband is planning to spend on it. The husband’s new research on co-benefits is interesting, and might tip the scales in favor of the purchase, but nobody should interpret them as saying the car is actually free.

Conclusion

As the years pass, the extreme climate activists are becoming more desperate in their rhetoric. Even Nobel laureate Paul Krugman is now mixing up costs and benefits in his zeal to saddle Americans with a carbon tax. The Krugman of 2009 knew that no “card-carrying economist” would talk this way; we can only hope his card is revoked.


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